I’ve been giving thought to changing the way we buy long puts. Usually we purchase 2x long puts with the same expiry as the trade. Usually its closed for negligible value. The average cost is about 4,500 a trade. It’s our black swan insurance and its part of the business. Caught without it during a flash crash or other similarly crazy event and you’d have catastrophic losses. However, the thing is, there has to be a better way, and I think I’ve got one.
Disadvantages of the normal method
1) Theta on the long puts is high, they’ll likely be worthless @ time of closing the trade
2) Since the extrinsic is low and gets lower as the trade goes on, volatility has less and less of an effect.
My suggestion is to purchase year out puts about -20 delta and sell 25% against each trade period to offset the costs.
Benefits of new method
1) You have way more extrinsic value so any increase in volatility will have a much more positive effect
2) Theta on the long puts are drastically reduced
3) You end up paying for the insurance over time thus saving the trade about 1-2% a month!
Just need to try and backtest different parameters and see if this thing could work.